KPG - Kiwi Property Group

[Basil]

Huge and very surprising ~ 26.7% drop in operating earnings and 25%+ drop in the all-important, (because it's used to measure their capability to pay dividends) adjusted funds from operations.  Makes me really wonder with the change in non-deducibility of depreciation next year if they can maintain their dividend going forward, very unlikely in my view.
They keep selling very high yielding assets and investing in BTR at a miserable projected 5%, makes no sense to me whatsoever.
Directors are confident that their transformation program with deliver better returns to shareholders in the future.  It is too early for a Tui ?  The only thing missing was the infamous "point of inflection." 

Just as well it's all going to be brilliant going forward and we can be so confident of this because the company has been so successful with tis developments in the past.  https://announcements.nzx.com/detail/422375

[snapiti]

you are being a little mischievous Mr Beagle, whilst adjusted funds from operations is very important surely one should use the like for like as a better gauge because this takes into account sale and purchase of properties during the year.....I see this like for like is -0.2% and earnings before tax -1%........hardly alarmist.
I do tend to agree the BTR is somewhat of a poor strategy and new tax deductibility rules will mean they will struggle to maintain dividend, still happy to up as may as I can afford should they slip back to 78cps again (offering a 11% gross yield and a 35% discount to NTA)

[Basil]

Buying into their like for like, you are in effect accepting their strategy that selling assets yielding 9-12% and replacing them with assets like BTR returning 5% is a value accretive process.  At the end of the day they're only going to be able to payout in the future based on adjusted funds from operations after tax and I see that heading down in the years ahead.  Been there and done that with theoretical discounts to NTA.  Buying stocks for yield, all that matters in my book is what they can pay you.  Enjoy the 5.7 cps this year, while it lasts.  (Its 10% gross yield and 29% discount to NTA at 84 cents...certainly not worth that in my opinion)

[BlackPeter]

Buying into their like for like, you are in effect accepting their strategy that selling assets yielding 9-12% and replacing them with assets like BTR returning 5% is a value accretive process.  At the end of the day they're only going to be able to payout in the future based on adjusted funds from operations after tax and I see that heading down in the years ahead.  Been there and done that with theoretical discounts to NTA.  Buying stocks for yield, all that matters in my book is what they can pay you.  Enjoy the 5.7 cps this year, while it lasts.  (Its 10% gross yield and 29% discount to NTA at 84 cents...certainly not worth that in my opinion)

I guess you are right. From the point of view of a trader I would see in the coming months (potentially years) not a lot of gains and the risk of lower dividends. As long as Interest rates stay high and property prices are improving along an  "L"-shaped curve things will be tough.

If you look at it however with the eyes of a long-term investor things are quite different.

Their strategy to combine places to work, to live and to shop will be in my view a long term winner. People are sick to spend hours on the roads (and dearly pay for it) and climate change (less driving is better) adds another huge tailwind to support this strategy.

BTR might provide in the short term a lower return, but it provides as well the people needed by the leaseholders in the near shopping mall as customers, and it provides as well the workforce required by the companies close by who are leasing KPG's storehouses. Its not a loss leader, but having easy access to nearby customers and workers makes it more attractive for potential clients to lease a shop in their shopping mall or office space in their office buildings. Guess what happens to the lease income from shopping space and office space in prime locations?

Their property in Drury can only increase in value. The country needs space for more people in the Auckland area, and ideally without adding a lot more pressure on the traffic front. Great if they come in and maybe don't even need a car to go shopping or to work, isn't it?

Ah yes, and the old link between interest rates and real estate stll applies. Interest rates up, real estate down. Interest rates down, real estate up. Now - I agree, interest rates probably won't drop over night, but I'd say the odds that they will be in 2 years from now lower are better than the odds that they will go further up. Wouldn't you say so as well?

I do see property as an essential component of any portfolio, and the time to buy property (as anything else) is when the respective prices are down.

On top of that - I see KPG as an investment into a better future for all of us. We do need property companies helping to break the vicious circle linking economic growth with increased traffic. Our roads are full.

[Basil]

Good post BP and you make a robust case when you include the various ESG aspects.
Strip out all the ESG stuff however, and in my view your case is less convincing and is predicated upon the assumption that by pursuing ESG objectives this will be value and earnings accretive to shareholders in the long run.  I am not so sure.

So how have they gone in the last 10 years https://storage.googleapis.com/kp-corporate-production-web-assets/public/document-feed/KPG_2014-2013-11-11-b.-interim-result-presentation-six-months-ended-30-Sep-13.pdf seeing as they've been on this whole ESG goal pursuit for quite some time?  10 years ago, NTA was $1.16, higher than it is today and annual dividends 6.4 cents, again, higher than today.  Go back even further and I can recall them paying 8.5 cps and NTA being ~ $1.40.  This despite a booming property market for most of the last decade.  Hmmm

It all comes down to whether you believe it's going to be different going forward in the next decade but nothing, absolutely nothing the company has done in the past 20 years has been NTA or eps accretive.  I wonder how many times over the last 10 years, with NTA and dividends going nowhere or downwards, management have used the word "growth" in their presentations.  Hmmm

[BlackPeter]

Good post BP and you make a robust case when you include the various ESG aspects.
Strip out all the ESG stuff however, and in my view your case is less convincing and is predicated upon the assumption that by pursuing ESG objectives this will be value and earnings accretive to shareholders in the long run.  I am not so sure.

So how have they gone in the last 10 years https://storage.googleapis.com/kp-corporate-production-web-assets/public/document-feed/KPG_2014-2013-11-11-b.-interim-result-presentation-six-months-ended-30-Sep-13.pdf seeing as they've been on this whole ESG goal pursuit for quite some time?  10 years ago, NTA was $1.16, higher than it is today and annual dividends 6.4 cents, again, higher than today.  Go back even further and I can recall them paying 8.5 cps and NTA being ~ $1.40.  This despite a booming property market for most of the last decade.  Hmmm

It all comes down to whether you believe it's going to be different going forward in the next decade but nothing, absolutely nothing the company has done in the past 20 years has been NTA or eps accretive.  I wonder how many times over the last 10 years, with NTA and dividends going nowhere or downwards, management have used the word "growth" in their presentations.  Hmmm

As we discussed already before - I don't see ESG as a four letter word. While I agree with you that many companies use it as a figleaf to cover up for their bad performance (which is not good), I still can't see any company being long term successful without considering and adapting to societal changes and values.

I realise as well that your extrapolation method mainly seems to be linear (the past is the best guidance to the future). And actually, this might be for a trader a quite appropriate way to do it. Links perfectly into the old adage "The trend is your friend", which gives you typically in random scenarios something like a 60% plus success rate.

Its just - I always try to see what's behind the next corner - and I do see long term huge opportunities for KPG's strategy. Having said that - you could argue as well that no opportunity is big enough that it can't be screwed up by bad management, and this is true as well.

I guess we will need to wait how it plays out - and I assume that we both might use different time windows to assess that.

[KW]

They keep selling very high yielding assets and investing in BTR at a miserable projected 5%, makes no sense to me whatsoever.
Directors are confident that their transformation program with deliver better returns to shareholders in the future.  It is too early for a Tui ?  The only thing missing was the infamous "point of inflection." 

This is exactly why I invest in ASX property stocks and not Kiwi ones.  This makes zero sense to me either.  I thought they were nuts when they sold Northlands Mall in Christchurch.  Its clear that CBD shopping is dying, and smaller secondary malls aren't doing as well either, while shoppers en masse are being driven to the big malls.  In Christchurch this means the big two - Riccarton and Northlands.  Why sell the creme de la creme of Christchurch shopping sites?

Ditto for IKEA.  Who in their right mind would sell off the IKEA site? I would consider that a gem in terms of retail property.  Instead they are focusing on Drury (povvos out in the sticks are not the most lucrative market) and Build to Rent?  

Reminds me  of "how do you make a million dollars?  Start with a billion and blow it on bad deals". 

Meanwhile, Vicinity in Australia are investing $620M in their Chatswood Chase mall in Sydney, after having bought the other half they didnt already own.  They know what they are doing.  And I know which one I'd rather own.

[KW]

Their strategy to combine places to work, to live and to shop will be in my view a long term winner. People are sick to spend hours on the roads (and dearly pay for it) and climate change (less driving is better) adds another huge tailwind to support this strategy.

I would disagree, and say that the opposite trend is true.  People are being driven from CBD and small suburban shopping malls to the large shopping malls.  Small suburban malls do not have enough traffic to support specialty stores, so people still have to trek to the larger malls - and while there they will do the rest of their shopping.  Only need to look at the traffic heading to the Westfields the last two weeks. 
 
Small malls in Christchurch are dying while Riccarton and Northlands just keep getting bigger and bigger.  Since rents are usually tied to shop revenues, then the more turnover a store does, the higher the rent.  Shops in malls with low turnover will pay less.  Suburban shopping malls are only good for the basics - supermarket, chemist, cafe, a Warehouse, liquor store, etc.  But you want the Costco's, the IKEA's, the KMarts, the stores that drive traffic not just to themselves, but to everyone located around them.

I suppose you can hope that the concept of a 15 minute city actually does happen, where we are all locked into our local areas and not allowed to leave.  But I'm still optimistic that people will rebel against the concept.  And if not, they'll simply pack up and move to Australia (which will probably be the last bastion of non-wokeness lol)

[snapiti]

market seems to like it.....Sp 86cps....I will buy more when Sp is 78cps again

[CG]

This is exactly why I invest in ASX property stocks and not Kiwi ones.  This makes zero sense to me either.  I thought they were nuts when they sold Northlands Mall in Christchurch.  Its clear that CBD shopping is dying, and smaller secondary malls aren't doing as well either, while shoppers en masse are being driven to the big malls.  In Christchurch this means the big two - Riccarton and Northlands.  Why sell the creme de la creme of Christchurch shopping sites?

Ditto for IKEA.  Who in their right mind would sell off the IKEA site? I would consider that a gem in terms of retail property.  Instead they are focusing on Drury (povvos out in the sticks are not the most lucrative market) and Build to Rent? 

Reminds me  of "how do you make a million dollars?  Start with a billion and blow it on bad deals".

Meanwhile, Vicinity in Australia are investing $620M in their Chatswood Chase mall in Sydney, after having bought the other half they didnt already own.  They know what they are doing.  And I know which one I'd rather own.

"Land ownership is typical of IKEA stores worldwide, demonstrating their long-term commitment to the local communities in which they operate. This also enables IKEA to oversee the quality of the store and overall shopping experience." https://www.ikea.com/nz/en/newsroom/corporate-news/ikea-purchase-of-land-at-sylvia-park-complete-pub086f7a70#:~:text=This%20arrangement%20was%20mutually%20agreed,communities%20in%20which%20they%20operate.

So, if you want IKEA to bring foot traffic you sell them a chunk of land. Also, KPG owns all adjacent land and plans extend their Sylvia park shopping mall (which is already biggest in the country and bigger than Chatswood Chase mall in Sydney) to capitalize on IKEA presence

[LaserEyeKiwi]

Huge and very surprising ~ 26.7% drop in operating earnings and 25%+ drop in the all-important, (because it's used to measure their capability to pay dividends) adjusted funds from operations.  Makes me really wonder with the change in non-deducibility of depreciation next year if they can maintain their dividend going forward, very unlikely in my view.
They keep selling very high yielding assets and investing in BTR at a miserable projected 5%, makes no sense to me whatsoever.
Directors are confident that their transformation program with deliver better returns to shareholders in the future.  It is too early for a Tui ?  The only thing missing was the infamous "point of inflection." 

Just as well it's all going to be brilliant going forward and we can be so confident of this because the company has been so successful with tis developments in the past.  https://announcements.nzx.com/detail/422375

Incorrect. If you listened to the conference call today they said the elimination of commercial building depreciation will have future annual impacts of between $4.5m-$5m on AFFO. This is less than the extra net income that they will generate from BTR 1 Sylvia Park alone, without even including regular rent review increases and completing leasing of 3 te kehu way.

So nope, no danger to dividend. They even turned off DRP this quarter because they said they dont require the extra capital currently.

Also said Drury will start to contribute significantly to AFFO from FY25/26 (from residential superlot sales to developers) - a lot earlier than many expected. This could actually lead to dividend increases in those coming years if they maintain the 90-100% AFFO payout ratio.       

[snapiti]

Incorrect. If you listened to the conference call today they said the elimination of commercial building depreciation will have future annual impacts of between $4.5m-$5m on AFFO. This is less than the extra net income that they will generate from BTR 1 Sylvia Park alone, without even including regular rent review increases and completing leasing of 3 te kehu way.

So nope, no danger to dividend. They even turned off DRP this quarter because they said they dont require the extra capital currently.

Also said Drury will start to contribute significantly to AFFO from FY25/26 (from residential superlot sales to developers) - a lot earlier than many expected. This could actually lead to dividend increases in those coming years if they maintain the 90-100% AFFO payout ratio.       

I very much suspect there will be a very pleasant surprise when we get to see the price achieved for any Drury residential super lot sale given the rezoning that KPG have secured for Drury and the crazy LUC 1,2 & 3 rules now in place

[Shareguy]

Craig's dont like the result

KIWI PROPERTY GROUP (DOWNGRADE TO UNDERWEIGHT) – 1H24 AFFO dropped -25.4% to NZ$48.6m although this was primarily driven by asset disposals over the past year or so. While KPG reaffirmed dividend guidance for FY24e at 5.7cps, Hill remains more cautious on the medium-term outlook, with KPG's Build to Rent project at Slyvia Park targeting a relatively skinny yield on cost (4.5-5.0%) - on ambitious although not impossible rental price points. On a yield plus growth (to FY27e) analysis KPG now screens at the bottom of the pack in terms of sector returns at 0.3% (sector +5.3%) and in conjunction with a small lift in his equity beta this drives a 5cps reduction in his TP to 78cps. Downgrade to Underweight accordingly.   

[Basil]

Broker speak translated into English.
Strong Buy = BUY
Buy = Accumulate
Overweight = Hold or accumulate if you don't have enough
Hold = Reduce
Underweight = SELL

I think those rental price assumptions for BTR are very optimistic, as is the very modest net yield.  I predict they will be very slow to fill the apartment block and costs for things like methamphetamine contamination will be much higher than they are forecasting.

[winner (n)]

Exciting times ahead for two of most discussed and loved stocks

Resido on one hand and The Helier on the other